IVA advice - what is an IVA and can it help you out of debt?

What is an IVA?

An IVA or Individual Voluntary Arrangement is a legally binding contract between you and your creditors to pay off as much as you can afford over what is usually a 5 year period.

They were first introduced by the Government in 1986 as a way of helping creditors (the people you owe money) recover more money than they would have received in Bankruptcy and debtors avoid some of the main drawbacks of bankruptcy.

Assuming your creditors agree to your proposal (75% by value of debt must vote in favour of it), interest and charges will be frozen and you and your home will be legally protected from any further enforcement action by your creditors.

How much debt is written off?

The principle behind an IVA is that the debtor (who owes the money) repays what they can realistically afford each month over a five year period. How much debt is written off depends on how much was owed originally and how much the debtor is able to repay over the five years. Don't believe the hype of the often reported 90% of debt being written off - average write-offs are a more realistic 50% - 60%.

Is there a catch?

Surprisingly, a lot of people don't opt for a IVA because they think it sounds too good to be true. To set the record straight, an IVA is in fact a very real debt solution that is written off into statute (UK Government Insolvency Act 1986). An IVA is started in the UK about every 13 minutes. See also IVA Gov.

Where can you get an IVA?

Only an insolvency practitioner can propose and manage your IVA. Insolvency practitioners tend to be part of firms or organisations that provide debt solutions. We feature a number of IVA companies on the site and are happy to provide their details for you.

How much does an IVA cost?

The cost of an IVA depends on how much you can afford to pay your creditors each month and whether any assets that you own have any equity in them that can be released. Your monthly payment is based on how much you have left over after your essential living costs and priority debt re-payments have been accounted for.

It doesn’t matter how much your current monthly creditor payments are, this reduced amount is the only amount you’ll ever be asked to pay. The licensed professional that administers the IVA, known as an Insolvency Practitioner, does receive a fee for setting up and managing the arrangement. The fee is actually part of your monthly payment you make to your creditors. The reason that they are sometimes described as a free IVA is because in most cases, you pay back less overall than you owed originally (the average write-off in an IVA is 50% to 60%).

Whilst this is typically the case, it’s still important that you are aware that fees are involved as there are certain circumstances which may result in you being liable for an amount equivalent to the fees in addition to the debt - for example, if you received a windfall such as winning the lottery, which meant you were able to pay back all of your debts or if your IVA fails, which means you’ll have paid an amount in irrecoverable fees up to that point.

IVA pros and cons

The advantages of an IVA are:

You can maintain monthly payments at an affordable level

You keep your house - although you may need to release some of the equity that is available

Any unaffordable debt will be written off - on average this is 50% to 60% of the original debt

Interest and charges are frozen

Your creditors are legally prevented from taking enforcement action against you such as petitioning for your bankruptcy

You're facing up to your debts and repaying as much of the borrowed money as you can afford

You’re hopefully on the road to financial recovery

The disadvantages of an IVA are:

You’ll need to be disciplined with your spending and stick to a budget for 5 years

If you own a house with equity, you may be asked to release some of it

A record of your IVA will be held on the Insolvency Register as well as on your credit file for 6 years. This means your credit rating will be affected during that time, making borrowing money more difficult and more expensive

If your IVA does fail for whatever reason, any fees you have paid up to that point won’t be recoverable

Would you qualify for an IVA?

You've had the IVA explained, and should now find out whether you would qualify for an IVA. We advise that you speak to one of our recommended debt advice charities to find a suitable solution for your situation. >>